Free Markets vs. Corporate Greed - Analysis of the HD Format War

There seems to be a bit of misunderstanding as to the nature of true competition and the nature of government intervention in the free market. As our model for discussion, let's take the European Union's (EU) recent decision to start a preliminary investigation into the HD DVD and Blu-ray Disc situation. We'll focus on some recent forum commentary that outlines some of the thinking surround free market economics and corporate irresponsibility.

I don't see how forcing companies to do the bidding of the government is a good thing. Good business comes from proper competition

- Audioholics Forums

Proper competition is the point.

Free market economics, to function properly, requires that economic entities, companies, act independently to forces applied by the marketplace. With the goal of maximizing profit, companies do not always act in concert with the free market concept and will seek ways to minimize or circumvent free market action upon their business and eliminate competition. When successfully implemented, such actions will lead to monopoly, in the case of an individual company, or oligopoly, for collusion between several companies, which ultimately limits the availability of competing products and gives such companies ability to set pricing independent of market demands.

It is a common function of almost every democratic government, in representing its people, to develop economic policy and laws defining competition and common rules of acceptable and ethical behavior by which companies must engage to maintain competition and police the actions of companies for compliance. Because not every company adheres to the law, deliberately or incidentally, and some attempt to stretch interpretation to gain competitive advantage and fatten profits at the expense of consumers, it is at this unfortunate point at which government steps in.

One type of anticompetitive practice occurs when individual companies make explicit or implicit agreements to limit market pressures by acting in concert or colluding. Two basic forms of agreements can occur: horizontal and vertical.

Horizontal agreements are agreements between direct competitors to limit market forces acting between them. These agreements occur between similar levels in a supply chain, such as between several retailers or several suppliers.

Vertical agreements are between different levels of a supply chain. Here, such agreements might occur between a group of suppliers or retailers. Competitive forces might be limited by an agreement restricting interaction between a retailer and other possible suppliers or a supplier with other retailers.

In the case of the next generation optical disk format, vertical agreements are in question. The two competing formats have taken steps to prevent content suppliers from dealing with the other side. This forces a choice, not between Blu-ray and HD-DVD, but between films such as ‘Pirates of the Caribbean’ and ‘The Matrix’ as recently made the headlines.

Exclusive agreements limiting the availability of films to one format or the other is clearly an anticompetitive agreement, now the only question is have these agreements crossed the line of legality. In the end, the winning cartel will stand to make unchecked profits from licensing to all remaining parties not a part of the original agreement.

True competition between the formats would be between the formats, not which movies are available on one or the other.

Government intervention is not preferred, but when companies circumvent competition to corner a market, it becomes necessary.

and seeing as how one of these technologies may be a bit more expensive, but also a bit more technologically advanced

- Audioholics Forums

Blu-ray and HD-DVD are nearly identical in their technological sophistication and neither are in any way revolutionary, as marketing claims. The optical disk, in analog video form, dates back to 1961 and was patented in 1968 by David Gregg. Digital recording methods were applied to the medium in the late 1970’s and early 1980’s. That was the last revolution, the rest is evolution of methods to store, read, and compact data into less space.

Both formats are capable of encoding and decoding the same video compression algorithms, the same audio compression algorithms, and both even use the same blue-violet laser with a 405 nm wavelength. Some differences exist in each format's ability to provide interaction and access online content, but even this is minimal at best (and not yet widely implemented). And one has to remember all of those special features and interactivity we were promised on DVD that never regularly appeared (except perhaps on the fourth released version of a film).

But basically, bioth formats are the same other than higher and lower bit rates here and there.

Oh, and Blu-ray holds more data. However, holding more data comes at a price that the Blu-ray marketers have managed to spin as some sort of revolutionary technical superiority.

Blu-ray simply places the laser physically closer to the disk, requiring a different lens aperture than HD-DVD. Like when something is too small to see well, so one puts their eye closer to see it better.

Genius.

Here is the part where the Blu-ray manufacturing cost difference comes in. In order to stuff in more data, the microscopic pits, in whose dimensions digital data is stored, have to be smaller and closer to the surface of the disk because of refraction of the laser through the clear protective layer. This affects costs threefold: tolerances for physical data storage must be tighter requiring more precise manufacturing, the optics of the laser also have to have tighter tolerances raising cost, and the reduced thickness of the protective layer changes the manufacturing process enough that production lines must be retooled significantly.

There are other side effects as well. The focal distance requirements leave the data layer of the disks more susceptible to physical damage. The aperture difference also makes compatibility between formats an exercise in optical/mechanical gymnastics that has so far left combination player more expensive than buying players from both formats separately.

Both formats support the same picture and sound quality, but one costs more to make and is less efficient with reuse of existing resources to gain a slight advantage in raw data storage capacity. From the standpoint of both economics and engineering, one is technically superior: same performance at less total cost.

I have no belief that this mentality will at all help or support consumer adoption.

- Audioholics Forums

Competition has nothing to do with consumer adoption, it has to do with choice, and if consumers choose neither, which is the current trend, there need be no adoption. The key is that the consumer decides, not cartels of movie studios and hardware manufacturers.

I would call the statement very short sighted for what it would really do and I don't believe that government interference will help consumers to actually have choice.

- Audioholics Forums

There is a distinction to be made between interference and enforcement, these companies would only be doing the bidding of the government if a particular format were mandated, not if the formats are forced to compete on a level playing field.

And right now, one does not have a choice: some movies are only available on one player and some are only on the other, unless one feels that buying both of the players constitutes an acceptable choice. All of this comes about because the two sides could not agree and follow the DVD Forum, of which all the parties are members, everyone participated, and none had an unfair advantage related to licensing fees and royalties.

Afterwards, the winner(s) of the format war will get to charge whatever they want for licensing and the consumer will have bear it.

I for one, support any democratically elected government that will keep greedy companies from cornering and taking advantage of consumers. That is what they are for: public service.